Looming Tax Hike Motivates Owners to Sell

November 6, 2012

A forthcoming capital-gains tax increase for next year is fueling the sale of some privately held enterprises. The maximum tax on investment income is projected to rise from 15 percent, currently, to at least 23.8 percent on most capital gains, says the Wall Street Journal.

Many business owners are swiftly reacting to avoid an impending loss.

  • One such entrepreneur, Bert Wolf, founder of Acetylene Oxygen, reasons that it made sense to take the chips off the table. He has an agreement to sell his compressed-gas business.
  • If Wolf waited until the tax increase to sell, he would have to expand the business at the current rate for at least three or four more years to achieve similar after-tax sales value.

Moreover, the weak economy has been difficult for many small business owners across industries.

  • The median selling price for small businesses was $174,000, down 8.2 percent from four years pass.
  • This year, 3,536 small businesses exchanged hands, down 34 percent from previous years since 2008.
  • Taxes will aggravate the climate for businesses to endure; the private sector will experience further flight.

The market will have more sellers than buyers of small businesses. Both are motivated by taxes to some degree.

  • Sellers are looking at the scheduled increases in capital gains rates.
  • Buyers are being discouraged by the overall uncertainty over tax policy.
  • Uncertainty over tax-reforms stymies a vibrant and dynamic market, which is important for stimulating the economy.

Source: John D. McKinnon, "Looming Tax Hike Motivates Owners to Sell," Wall Street Journal, November 1, 2012.

 

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